News

Feed-in tariff jumble – a failure of leadership and a disincentive for investment

11.08.2010

Jessica Casben, Solicitor

The new climate change mantra for both of Australia’s major political parties is practical action targeted towards reducing Australia’s dependence on fossil fuels and pollution intensive energy sources. While both sides of politics recognise the importance of supporting renewable energy sources, they have failed to show any strong and real commitment to achieving sustainable growth in the renewable energy industry.

Most participants within the renewable energy industry recognise that government funded customer rebates are unstable and threaten the renewable energy industry with the same quick boost, followed by a hard fall, that has been experienced by the insulation industry. One practical and important action that all political parties should be embracing is a national feed-in tariff scheme, which will achieve real, sustainable growth in the renewable energy industry.

Australia currently has eight separate renewable electricity feed-in tariff schemes, one for each State and Territory. The operation of these schemes is governed by the legislation and agencies of each State and Territory, and each scheme has different benefits, structures and obligations. This diversity has resulted in uncertainty within the market and industry, which in turn has hampered long term, Australia-wide investment in the Australian renewable energy industry.

A key reason behind the success of national feed-in tariff schemes in Europe has been that they encourage long-term investment in renewable energy technologies and industries. However, in a country like Australia, with a small population, and with eight different schemes operating, and with State and Territory governments demonstrating a willingness to suddenly and dramatically change and weaken their local schemes, the outcomes of feed-in tariff schemes in Australia are far from optimal.

The Australian government should take a leadership role on feed-in tariffs. A single national feed-in tariff scheme should be implemented across all jurisdictions. Investors will be encouraged to back renewable energy technologies and industries if there is a predictable regulatory environment in place.

This newsletter examines the state of Australia’s feed-in tariff jumble, and the options and challenges for a uniform national scheme.

What is a feed-in tariff scheme?

In simple terms, a feed-in tariff scheme is a government enforced obligation on electricity providers to pay a consumer (eg a homeowner) for electricity produced through a renewable energy source which is returned to the electricity grid. For example, if a homeowner has a solar power system installed on the roof of the homeowner’s premises, and some or all of that “green” electricity is fed back into the grid, the homeowner will be paid for that electricity. The rate is at a premium to the electricity grid price. The rate can be as much as 3.5 times that price.

“Net” and “gross” feed-in tariff schemes

However, there are “net” and “gross” feed-in tariff schemes. In a “net” feed-in tariff scheme, electricity providers are only required to make premium payments for green electricity “left over” after the household or business generating that electricity has deducted its own electricity consumption.

In a “gross” feed-in tariff scheme, all of the green electricity that the household or business produces is fed into the grid, and all of it attracts the premium payment. Unsurprisingly, “gross” feed-in tariff schemes result in larger premium payments being paid to consumers than under net feed-in tariff schemes.

Net schemes are in operation in Queensland, Victoria, Tasmania, South Australia and in the Northern Territory. A net scheme will commence in Western Australia on 1 August 2010. Gross schemes currently operate in New South Wales and the Australian Capital Territory.

Australia has eight different feed-in tariff schemes

The common way for Australian businesses and investors to profit from a feed-in tariff scheme is through investing in the renewable energy industry. Feed-in tariff schemes encourage growth in the renewable energy industry. The schemes have been used to excellent effect by the renewable energy industry to attract customers to renewable energy generation systems, such as roof-fitted solar photovoltaic systems.

However, Australia’s multiple various feed-in tariff schemes have resulted in a changeable and uncertain investment environment. National consolidation is called for, to overcome these uncertainties. Not only does Australia currently have two basic types of schemes (“net” or “gross”), each of the eight jurisdictions has unique features to its regulatory settings which modify the operation of the same scheme in different places.

Other differences between Australia’s feed-in tariff schemes

Capacity limits

Each of the feed-in tariff schemes have maximum capacities, which limits the amount of green electricity that can be produced in that jurisdiction before the scheme is suspended. For example, in New South Wales the scheme is capped at 50 mega-watts,1 whereas in Victoria the scheme will be suspended when 100 mega-watts is reached.2

Overall generation caps are an essential feature of successful feed-in tariff schemes. It has been observed internationally that there has been a distinct shortage of investment in schemes without an overall generation cap, as they lack certainty and clear limits.3 With different overall generation caps throughout Australia (and some jurisdictions not having any cap at all) investors in renewable energy are uncertain about the prospects of a State feed-in tariff scheme reaching its limit, or of being summarily suspended or cut-back.

Duration of the schemes

The feed-in tariff schemes in each State and Territory have different sunset periods after which they will either be reviewed, suspended or terminated. For example, the New South Wales scheme has a seven year lifespan,4 whereas the Australian Capital Territory scheme will continue for 20 years.5 The length of the feed-in tariff scheme is one of the key measures used by investors in price setting. It directly determines the time they have available to recoup their investment and to make a profit. Differing time periods across Australia makes large-scale renewable energy industry investment more difficult.

Maximum size of individual systems

Each State and Territory has placed its own limit of the maximum size of the system that a household or business may use to generate green electricity in order to receive premium payments. For example, in New South Wales only generation systems that have the capacity to generate 10kWs of green electricity each day are eligible for feed-in tariffs.6 In Victoria the maximum size of generation systems is 5kWs.7 In South Australia it is 30kWs.8

Differences between the sizes of generation system are significant for the renewable energy industry, as the size of the system dictates the value of the system. For instance, a typical 5kW solar photovoltaic system will cost approximately $15,000, whereas a 30kW system will cost hundreds of thousands of dollars. These differences are highly significant for investors in the renewable energy industry.

In the Australian Capital Territory, the Government is currently considering whether to extend the gross feed-in tariff scheme to systems of over 30kWs as a means of attracting “green” commercial investment to the Territory.

A European model for an Australian national scheme

Models for national consolidation are visible in Europe, and most especially in Germany.

Official estimates from Europe are that 9% of Spain’s electricity is supplied by solar sources, and that Germany receives over 5% of its national electricity requirements from solar energy.9 This has provided significant benefits to both industry and business in these countries. For example, in Spain increases in the percentage of national electricity being sourced from renewable energy has been credited with reducing the wholesale price of electricity.10 A key reason for the long term and sustained success of the renewable energy industry in Europe has been the willingness of national governments to embrace national renewable electricity feed-in tariff schemes.

Germany first introduced a national renewable electricity feed-in tariff scheme in 1991 through the Electricity Feed Act 1991,11 and further expanded its operation in 2000 through the Renewable Energy Sources Act 2000 (“the German Act”).12 The German Act has been credited with generating large scale investment in the renewable energy industry in Germany and encouraging a large expansion in the solar power industry. For example, between 2000 and 2005 there was a 700% increase in Germany’s solar power capacity.13 However, most importantly this growth has been consolidated and the German renewable energy industry is largely self-sufficient.

The success of the German national renewable electricity scheme over the past 19 years is due to a philosophy of sustainability, and long term investor certainty. The basis for the German feed-in tariff scheme is a 20 year flat rate tariff contract, which allows an investor to have a guaranteed and constant income stream. A long term and large scale national scheme has ensured the sustainability and the success of the German renewable energy industry.

A uniform national scheme for Australia

At the Council of Australian Governments meeting in March 2008, which was over two years ago, it was agreed that Australia would harmonise its approach to feed-in tariffs.14 However, harmonisation has not been achieved: in fact the opposite is true. In fact despite these sentiments within COAG, and all of the rhetoric about a “single electricity market”, a private member’s bill introduced into the Federal Parliament which was designed to introduce a national feed-in tariff scheme in Australia was not supported and was eventually defeated.15 Nothing sponsored by the major parties has come forward in its place.

The success of national feed-in tariff schemes in Europe provides a clear message to both sides of Australian politics: large-scale national feed-in tariff schemes can provide significant benefits for the environment, for the economy and for business. A uniform national feed-in tariff scheme would provide the renewable energy industry with certainty and clarity, and would attract long-term institutional investment.

State and Territory governments have indicated that the feed-in tariff scheme in their jurisdiction will cease if and when a Commonwealth Government administered national feed-in tariff scheme is introduced.

All that is required is for federal legislators to now design and embrace a sustainable and predictable national scheme.

1) Electricity Supply Act 1995 (NSW), Section 195

2) Electricity Industry Amendment (Premium Solar Feed-in Tariff) Act 2009 (Vic), Section 40FE

3) Qualitative Issues in the Design of GB Feed-in Tariffs, A report of the United Kingdom Department of Energy and Climate Change

4) Electricity Supply Act 1995 (NSW), Section 15A(9)

5) Electricity Feed-In (Renewable Energy Premium) Act 2008 (ACT), Section 11

6) Electricity Supply Act 1995 (NSW), Section 15A

7) Electricity Industry Amendment (Premium Solar Feed-in Tariff) Act 2009 (Vic), Section 4

8) Electricity (Feed-In Scheme—Solar Systems) Amendment Act 2008 (SA), Section 36AC

9) Germany Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, 2008

10) Vizcaíno, “Analysing the impact of renewable electricity support schemes on power prices: The case of       wind electricity in Spain”, Energy Policy, 2008

11) Electricity Feed Act 1991(Federal Republic of Germany)

12) Energy Sources Act 2000 (Federal Republic of Germany)

13) Feed-in tariffs, Australian Parliamentary Library, 2008

14) Communiqué – Council of Australian Governments, 26 March 2008

15) Renewable Energy (Electricity) Amendment (Feed-In-Tariff) Bill 2008

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.